Tax Depreciation Facts: Myths and Truths
I’m often amused by some of the things I hear about depreciation. Over the years, I have heard some incredible statements. So here I’ll give you the facts and dispel any of the myths that you might
1. MYTH: You can only depreciate new properties
There is a myth that you can only claim depreciation on new properties. This is not true. The truth is, old properties depreciate too because the purchase price of your property includes the land,
building, and plant and equipment. This means even properties built before 1985 (when the building allowance kicks in) are worth depreciating. Whatever the age of your property investment you
should have a quantity surveyor have a look at it and provide you with a report.
2. TRUTH: The taller the building, the higher the depreciation
Sounds a bit odd, but this is true. Taller buildings attract higher plant and equipment allowances and therefore higher depreciation claims. Some of the services required as buildings increase in height are obvious, such as lifts (and other transport services). Other Depreciation services are less obvious, such as fire hose reels and intercoms which are all depreciable under this category. The other reason tall buildings attract higher depreciation is because of the higher ratio of plant and equipment due to the amenities the developer provides. For instance, some high-rise buildings have swimming pools, gyms and even mini cinemas.
3. MYTH: All construction costs are eligible for depreciation
In this country we are fortunate we can claim the depreciation of an investment property as a tax deduction. But not all construction costs are eligible. When claiming depreciation of a building we are essentially claiming what is there now. So it stands to reason that costs such as demolition or site-clearing can’t be claimed. Landscaping is another construction cost that you have to be careful with. Trees and grass grow, so they don’t depreciate over time!
4. TRUTH: Building profit can be claimed
If you engage a builder directly to complete your investment property, then you can claim the builder’s profit component of the work. However, if you buy a finished apartment from a speculative
builder/developer, then their building/developing profit does not form part of the amount you can claim.
5. MYTH: A depreciation report is not worthwhile for a property bought close to the end of the financial year
In the first financial year of ownership – even if you take ownership towards the end of the financial year – it is not uncommon for an investor to claim thousands of dollars’ worth of deductions for a property purchased close to June 30. Why? Well, specific plant items in the property valued under $300 are eligible for an immediate write-off and those under $1,000 can be ‘low-pooled’ and written off at an accelerated rate of 18.75% (more about this later in the book). As neither of these amounts should be pro-rated, they can be claimed in full regardless of whether the property has been owned for 1 day or 365 days.
6. TRUTH: Furnishing can boost your depreciation claims
Furnishing your property is another way to increase your depreciation deductions as it attracts higher depreciation rates. For example, a $20,000 furniture package supplied by a developer can
result in an additional $10,000 deduction in the first year alone. But remember, furnishing your investment isn’t necessarily the best option for all properties and locations. It’s better suited to smaller one or two bedroom apartments in transient areas that attract short-term tenants and holiday rentals. Other property types might be more difficult to let if they are furnished.
7. MYTH: Accountants can prepare depreciation schedules
The truth is an accountant, real estate agent or property valuer is not qualified to prepare a depreciation schedule on your property. The ATO has identified quantity surveyors as appropriately qualified to estimate the original construction costs in cases where that figure is unknown.
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